Sound Money vs. Stable Money

History has demonstrated that the disadvantages that sound money advocates predicted for any stable money regime are real: constant inflation and increased government size and power. The advantage of stable money was supposed to be a release from the cycle of recession, panic, and periodic deflation. But it now appears that such outcomes still occur regularly, despite a stable money policy. The stable money advocates’ suggested solution: more government controls.

The current stable money policy goal in the United States, Europe, and Japan is 2 percent inflation per year.

What happens under this policy is that the same goods and services that cost $1 today will cost $1.64 in 25 years, a reasonable retirement length, given our rising lifespans; $2.44 in 45 years, when someone who starts work today will retire; and $5.38 in 85 years, the potential lifespan of a baby born today.

This is the “stability” goal that most central banks are determined to achieve. In the United States, we have never achieved this “stability” goal. The U.S. Department of Labor’s Bureau of Labor Statistics website notes that $1 in 1913 — the year the Fed was created and the U.S. government became able to institute a “stable money” regime — would buy as many goods and services as it requires $23.37 to buy today. That’s an average inflation rate of 3.23 percent per year.

So let’s substitute 3.23 percent — the actual performance figure — for the 2 percent policy goal and see what happens.

What happens is that the same goods and services that cost $1 today will cost $2.22 in 25 years, $4.19 in 45 years, and $14.97 in 85 years.

The Insourcing Boom

After years of offshore production, General Electric is moving much of its far-flung appliance-manufacturing operations back home. It is not alone. An exploration of the startling, sustainable, just-getting-started return of industry to the United States.

For years, too many American companies have treated the actual manufacturing of their products as incidental—a generic, interchangeable, relatively low-value part of their business. If you spec’d the item closely enough—if you created a good design, and your drawings had precision; if you hired a cheap factory and inspected for quality—who cared what language the factory workers spoke?

This sounded good in theory. In practice, it was like writing a cookbook without ever cooking.

It happens slowly. When you first send the toaster or the water heater to an overseas factory, you know how it’s made. You were just making it—yesterday, last month, last quarter. But as products change, as technologies evolve, as years pass, as you change factories to chase lower labor costs, the gap between the people imagining the products and the people making them becomes as wide as the Pacific.

But many of those hidden costs come later. In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation. And it’s easy to assume that globally distributed production will hum along more smoothly than it often does in practice: however strong the planning, some of those shipping containers will be opened to reveal damaged or substandard goods, and some of them won’t have the number or variety of goods a company needs at that very moment.

Is The US Already In Recession?

By the way, I saw a disturbing report last week on CNBC from their reporter Phil LeBeau about US manufacturing companies with job openings they can’t fill. The normal explanation for this is that there are no applicants with the necessary skills for the job opening but this report was different. LeBeau profiled two companies with openings that required no skills – apprenticeship type jobs – but had no applicants. Why? It seems that jobless benefits are only slightly less than the starting pay and when you factor in all the other assistance available, taking the job means a pay cut for many applicants. From a short term economic standpoint, it makes perfect sense that these jobs are going unfilled. I don’t know if the answer is for the employers to raise the starting pay or for the government to cut the benefits – maybe a little of both – but having able bodied citizens refusing to take available jobs is a problem on many levels.

Labor Data Show That China Is a Bubble Waiting to Burst

by Benn Steil and Dinah Walker
December 5, 2012

As our figure above shows, the share of the Chinese labor force working in manufacturing and construction, at 38%, is roughly twice the global average – towering well above manufacturing powerhouses like Germany (25%) and South Korea (23%). Manufacturing’s share of the Chinese work force, at 29%, is also 6 percentage points higher than the level at which other fast growing economies have typically begun slowing. Once that share exceeds 23%, according to analysis by Barry Eichengreen, it “becomes necessary to shift workers into services, where productivity growth is slower.” Construction’s share of the Chinese labor force, at 9%, is also 2 percentage points higher than in the United States at the peak of the housing bubble in September 2006. Labor data therefore suggest that China is headed for an extended slowdown in GDP growth.

The world’s commodity supercycle is far from dead

Studies by the World Bank covering two centuries of data sketch a pattern of 10-year supercycles, followed by a slide for the next 20 years or so as excess investment leads to a flood of supply. The long bear market can be cruel for those hanging onto to resource stocks, convinced that the rebound must be nigh. …

Standing back, you might argue that commodities have held up remarkably well this year given that Europe has crashed back into double-dip slump, that the US slowed to stall-speed over the early summer, and that China itself has been through a quasi-recession with falling electricity use and rail freight, and a collapse in steel output.

For Brent crude to trade at $111 a barrel in such a bleak world suggests that Asia’s industrial revolutions have pushed oil prices to a structurally higher plateau. Energy costs may well punch higher once the next cycle of growth is under way.

No doubt the Malthusian narrative – peak this, peak that – at the top of the commodity boom four years ago was overblown. The US energy revival has shown how quickly human ingenuity can sweep away assumptions.

Yet all the nagging worries about resource depletion are still there. New supplies of oil are mostly deep in the ocean beneath of layers of salt, or in Russia’s arctic High North, or in Canadian tar sands at a production cost of $90.

The US National Academy of Sciences says that 26pc of all copper that ever existed in the earth’s crust has already been lost in usable form for mankind, and to my knowledge this claim has not been refuted. Platinum supplies are even tighter.

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America.
I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.